Nonprofits need their community’s trust more than ever

It is estimated that there are 1.5 million registered nonprofits in the U.S., each of which, in their own way, strive to make the world a better place. But in order to do that, they must first win the trust of the communities they serve.

“There’s a misconception that nonprofits get the majority of their funding from contributions,” says Melessa L. Behymer, CPA, a director at Brady Ware & Company. “On average, approximately 73 percent of their funding comes from fees for services from private and government sources, 9 percent from government grants and around 13 percent from contributions. All of these funding sources, in one way or another, require the organization to have community trust.”

Nonprofits, she says, are held to the highest threshold of accountability and are expected to be open and transparent in all areas. However, it can be a struggle to meet all the demands this expectation brings because the amount of data that nonprofits must maintain can be daunting.

“In an era of growing needs and shrinking resources, many nonprofits are starved for the kind of support that can strengthen their operations,” Behymer says. “Contribution income is the bridge, but organizations must show donors that they are trustworthy and good stewards of their contribution dollars because once public confidence is lost, it can be detrimental to nonprofits’ survival.”

Smart Business spoke with Behymer about some of the ways nonprofits can earn the trust of their stakeholders.

Why is trust between a community and its nonprofits an issue today?

Trust is the backbone in the relationship between a nonprofit and the community. The number of nonprofits grows every year, which means more competition for essentially the same dollars.

Additionally, social media has made it easier for nonprofits to reach people, increasing competition among organizations for the attention of donors. And the proliferation of the internet, along with more internet-savvy people, means that its easier than ever to research organizations to learn how they put those contributions to work.

Nonprofits that have questionable practices are far more likely to find their reputation in question, which can have a negative impact on contributions.

How can nonprofits gain the trust of the community through their board of directors?

Nonprofits must provide program outcomes that are impactful, that meet stakeholder expectations and do that in a manner that is both fiscally efficient and transparent. Much of this starts at the top. Nonprofits must have a strong board of directors who can be ambassadors capable of engaging the community. To do that, the board must understand the organization’s mission, the environment it operates in and be committed to organizational accountability.

This will look different from one nonprofit to the next. A small nonprofit with a small staff will need the board to be the expertise it can’t hire. They will need professionals such as CPAs, attorneys, and human resource experts to help the organization be in line with laws and regulations as well as help create the policies and procedures needed to be transparent. Larger nonprofits boards also require professionals, but their focus would be more strategic in nature.

How can nonprofits prove they’re transparent?

Nonprofits must have a strong set of policies and procedures in place in all areas of the organization so the community knows that programs are being monitored, run efficiently, and meet stakeholder needs.

Trust in financial accountability is critical. The organization must have systems in place to account for the money that comes in and report results. Large nonprofits can hire staff to ensure this happens. Smaller nonprofits struggle in this area. This is why most nonprofits will have a relationship with an outside accounting professional. Annual, independent financial statement audits are a powerful tool for the organization to show the community they are trustworthy.

Communities have a high level of expectation for their nonprofits. And while most funding comes from fees for services, it often doesn’t cover the cost of providing the services, which is why contribution income is critical and why transparent and accurate reporting is crucial to a nonprofit’s success.

Insights Accounting is brought to you by Brady Ware & Company

4 reasons why your technology isn’t working — and what to do about it

Business executives understand technology is critical for daily operations like communication and processing orders, which is why IT spending keeps growing. But many of those same executives don’t realize a meaningful return on their technology investment.

“They’re dissatisfied with the results of their implementation,” says Glenn Plunkett, director of application development at Clark Schaefer Hackett. “With bottlenecks and processing headaches, what they end up with only meets their desires halfway.”

Plus, recurring costs for support staff, license renewals, etc., make tech investments feel more like a cost than added value.

“The technology isn’t optimized,” adds Mat Jackson, director of sales at Clark Schaefer Hackett. “It isn’t a competitive advantage that produces meaningful data or adds efficiency.”

Smart Business spoke with Plunkett and Jackson about the potential barriers to reaping rewards from your technology tools.

Why is outdated technology a challenge?

Technology has a limited lifetime, so think of your systems as a constantly evolving asset. Over time, performance can degrade, business processes can change and newer/better tech may be available. Plus, most vendors sunset support for aging systems.

If your business still uses legacy technology systems, more modern hardware and software will likely provide many benefits. Remember, the ROI on tech investments decreases over time, so you should continuously evaluate and modernize your technology stack.

How can untrained users derail technology implementation and use?

Don’t assume your staff automatically knows how to use your systems. That’s why training resources is a worthwhile investment.

When new software or workflows are first deployed, end user training and communication are usually part of the process. However, users often only absorb the minimum knowledge necessary to accomplish their job. New staff also may not receive the same level of training as when the system was first delivered. Training and retraining remind users of your policies and procedures and help leverage your investment in the system. Therefore, be deliberate about allocating resources.

What happens when technology doesn’t adapt to work processes?

As business needs change and teams grow, workflows change. Technology tools need to support new ways of doing business, and systems need to change accordingly. In addition, off-the-shelf software may require you to alter your way of doing things to accommodate the way these tools work. 

Custom software can help mitigate this, bridging gaps between systems or implementing custom workflows from the ground up. Often, the cost can be recouped quickly with productivity savings.

What if work-arounds already meet your needs?

If you are using multiple tools to accomplish one task or using people to perform tasks that the computer should be doing, technology isn’t serving your business. Work-arounds are often the result of out-of-date tech, untrained users and tools that aren’t adapted to current work processes. 

It’s common for business users to turn to spreadsheets to get their work done because the business systems at their disposal cannot do what they need. Reporting, data manipulation and workflow automation are all good examples of areas where businesses use a tech tool with a manual component. However, these are also examples of things that can be automated.

For example, month-end closing might take weeks if your organization has a complex structure. It requires manual efforts to assemble the data, check the accounts and ensure proper allocation, in order to produce the reports that are reconciled against the ledger and ultimately used to generate the P&L statement. Fully leveraged technology can cut that time dramatically; what took weeks with manual work can turn into a handful of days.

While throwing more people at a problem is sometimes the best solution, first ask yourself whether technology can be employed in a better way. Rather than accepting manual work for repetitive tasks, put technology to work and free up people to be productive and creative.

Insights Accounting is brought to you by Clark Schaefer Hackett

Dissecting what the SECURE Act means for retirement plans

The SECURE Act, which stands for “setting every community up for retirement enhancement,” became effective Jan. 1, 2020. Jeffrey Spencer, principal at Ciuni & Panichi, says the law is likely the biggest change to retirement plans since the Pension Protection Act of 2006.

“The SECURE Act encompasses a host of provisions that increase the ability for people to save for retirement — either on their own through IRAs or retirement plans that their employers sponsor,” Spencer says. “Because the problem of retirement will only worsen as baby boomers retire, the ability to count on Social Security lessens, and millennials follow the trend of not saving enough.”

Smart Business spoke with Spencer about how the SECURE Act could affect both individuals and employers.

How does the SECURE Act impact the stretch IRA?

A stretch IRA was an estate planning strategy to shelter inherited IRA assets and income. You might pass your IRA down to your children, who could utilize it over the rest of their lives, without being taxed upfront. Based on their life expectancy, non-spouse beneficiaries would take a small required percentage annually, as the remaining funds continued to grow tax deferred. The SECURE Act effectively ended the stretch IRA. Now, a non-spouse beneficiary must liquidate the entire IRA within 10 years of the death of the original account owner. This generates revenue because withdrawals can be taxed sooner.

With the new 10-year limit on inherited IRAs, what are the planning challenges?

This mainly impacts the non-spouse beneficiaries of people with large amounts in their retirement accounts, such as C-level executives. An inherited IRA of $10,000 is less of an issue than $100,000-plus, which can impact your income tax bracket on a federal and/or state level. (Roth IRAs are excluded from taxable income but are required to follow the new 10-year rule.)

Higher income can affect Social Security taxation; Medicare Part B & D premiums; Income-Related Monthly Adjustment Amounts (IRMAA); interest taxation; qualifying for tax deductions or credits; and capital gains or dividend taxation. Another consideration is the Free Application for Federal Student Aid (FAFSA) and/or College Scholarship Service (CSS) Profile. If beneficiaries take too much one year, they may earn, in the government’s eyes, too much for financial aid. Also, some student loan payment rates are based upon income.

What can minimize these potential impacts?

Beneficiaries should work with an accountant and financial adviser. They don’t need to take funds every year and it doesn’t need to be the same amount each time — as long as the account is empty by year 10. That’s why it’s critical to create a withdrawal strategy, which looks at tax deductions and credits and utilizes planning and educated assumptions to minimize the impact. Also, beneficiaries who are 70.5 and older can give the inherited IRA money directly to a charity with no tax consequences.

Where do age limits differ under the act?

Previously, you couldn’t fund a traditional IRA, starting the calendar year you turned 70.5. With the SECURE Act, there are no age limits. This helps people who A) want a tax deduction, B) don’t have an employer plan, or C) are looking to fund a Roth IRA but were excluded due to income and/or tax filing thresholds.

In addition, seniors had to start taking minimum distributions at age 70.5. The SECURE Act pushes that to 72, starting with those who turn 70.5 in 2020.

How does this law impact businesses?

Under the law, more part-time employees can defer income. If you work at least 500 hours three consecutive years, your employer cannot preclude you from contributing to a 401(k).

The SECURE Act also enables small or midsize employers to join open multiple employer plans (MEPs) more easily. This is where unrelated employers sponsor retirement plans through a third party. The new rule separates out bad apples that aren’t administrating the plan properly — so it doesn’t taint the whole plan for all members.

The takeaway for executives is, make sure you take advantage of these new rules. If your company has a pre-existing retirement plan, you’ll still have to amend your plan and comply with the new rules as they come online over the next few years.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

4 reasons why your technology isn’t working — and what to do about it

Business executives understand technology is critical for daily operations like communication and processing orders, which is why IT spending keeps growing. But many of those same executives don’t realize a meaningful return on their technology investment.

“They’re dissatisfied with the results of their implementation,” says Glenn Plunkett, director of application development at Clark Schaefer Hackett. “With bottlenecks and processing headaches, what they end up with only meets their desires halfway.”

Plus, recurring costs for support staff, license renewals, etc., make tech investments feel more like a cost than added value.

“The technology isn’t optimized,” adds Mat Jackson, director of sales at Clark Schaefer Hackett. “It isn’t a competitive advantage that produces meaningful data or adds efficiency.”

Smart Business spoke with Plunkett and Jackson about the potential barriers to reaping rewards from your technology tools.

Why is outdated technology a challenge?

Technology has a limited lifetime, so think of your systems as a constantly evolving asset. Over time, performance can degrade, business processes can change and newer/better tech may be available. Plus, most vendors sunset support for aging systems.

If your business still uses legacy technology systems, more modern hardware and software will likely provide many benefits. Remember, the ROI on tech investments decreases over time, so you should continuously evaluate and modernize your technology stack.

How can untrained users derail technology implementation and use?

Don’t assume your staff automatically knows how to use your systems. That’s why training resources is a worthwhile investment.

When new software or workflows are first deployed, end user training and communication are usually part of the process. However, users often only absorb the minimum amount of knowledge necessary to accomplish their job. New staff also may not receive the same level of training as when the system was first delivered. Training and retraining remind users of your policies and procedures and help leverage your investment in the system. Therefore, be deliberate about allocating resources.

What happens when technology doesn’t adapt to work processes?

As business needs change and teams grow, workflows change. Technology tools need to support new ways of doing business, and systems need to change accordingly. In addition, off-the-shelf software may require you to alter your way of doing things to accommodate the way these tools work.

Custom software can help mitigate this, bridging gaps between systems or implementing custom workflows from the ground up. Often, the cost can be recouped quickly with productivity savings.

What if work-arounds already meet your needs?

If you are using multiple tools to accomplish one task or using people to perform tasks that the computer should be doing, technology isn’t serving your business. Work-arounds are often the result of out-of-date tech, untrained users and tools that aren’t adapted to current work processes.

It’s common for business users to turn to spreadsheets to get their work done because the business systems at their disposal cannot do what they need. Reporting, data manipulation and workflow automation are all good examples of areas where businesses use a tech tool with a manual component. However, these are also examples of things that can be automated.

For example, month-end closing might take weeks if your organization has a complex structure. It requires manual efforts to assemble the data, check the accounts and ensure proper allocation, in order to produce the reports that are reconciled against the ledger and ultimately used to generate the P&L statement. Fully leveraged technology can cut that time dramatically; what took weeks with manual work can turn into a handful of days.

While throwing more people at a problem is sometimes the best solution, first ask yourself whether technology can be employed in a better way. Rather than accepting manual work for repetitive tasks, put technology to work and free up people to be productive and creative.

Insights Accounting is brought to you by Clark Schaefer Hackett

Is your organization up to date on its HR compliance and training?

Human resources has never been more complicated. HR professionals are responsible for dealing with constant changes from the Department of Labor (DOL) or other regulatory agencies, while finding new talent and retaining employees in an operating environment of heightened awareness about harassment.

“In the last five years, I’ve seen more legislative updates and coverage of HR issues than I’ve seen in my 25-plus years of experience, and I only expect that to continue,” says Renee West, SHRM-SCP, senior manager and lead human resources consultant at Rea & Associates. “These changes can impact employers in a number of different ways through audits, lawsuits and insurance costs.”

Smart Business spoke with West about HR hot topics that employers cannot afford to ignore in 2020.

What are important changes and trends with regards to compliance?

There’s increased awareness surrounding workplace immigration and employment of legal workers. U.S. Immigration and Customs Enforcement opened 6,848 worksite investigations in fiscal year 2018, compared to 1,691 the prior 12 months. That led to 5,981 I-9 audits and more than 2,300 people being arrested at work. 

Employers need to ensure the I-9 Form is on file for every active employee hired since Nov. 6, 1986. Companies also must keep I-9s on file for terminated employees for the required time. Penalties for knowingly hiring and continuing to employ illegal workers can range from $375 to $16,000 and up per violation, with repeat offenders at the higher end. Failing to produce an I-9 can lead to penalties of ranging from $110 to upward of $1,100 per violation.

It’s also essential to have an updated employee handbook that reflects the wage and hour laws for overtime, meals and break periods, training and travel time, timesheet reporting, definition of the work week and deductions. During an audit, your handbook will be the DOL’s first reference. Also, because many policies depend on employee numbers, a business may move from one staffing level bracket to another as it grows.

All companies should review the handbook annually to ensure communications are consistent and the staff is up to date. After any updates, employees should sign an acknowledgement page that’s kept on file.

How did federal exempt overtime change?

The new overtime rule raised the ‘standard exempt salary level’ from $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker). It also raised the total annual compensation requirement for ‘highly compensated employees’ from $100,000 to $107,432 per year, and allows employers to use nondiscretionary bonuses and incentive payments, including commissions, paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices.

While the DOL hasn’t changed the current duties tests, the threshold increase means more employees will be eligible for overtime. Employers should review all job descriptions, looking at how they have employee jobs classified, either exempt or nonexempt, and the pay data for exempt workers earning below the new threshold. 

What can help minimize the talent shortage and maximize retention?

With a tight labor market, employers need the right fit for pre-screening job candidates. Reviewing and adjusting these procedures also may help ensure new hires stick around. In addition, many employers are looking outside the normal realm of hiring through internship and apprenticeship programs.

Retention needs to be a priority. What compensation and incentives will help current employees stay and attract new talent as well? Consider fringe benefits like paid time off, remote work, stay interviews, development programs, free lunch, etc.

Where does harassment come into play?

With the #MeToo movement, there is more visibility on harassment. It’s a best practice to have an updated, uniform general and sexual harassment policy in the handbook. Employers also should conduct annual training for all employees with a separate training for managers and supervisors, who are often the initial contact if there is a problem. Along with documenting who has been trained, if there’s a solid reporting structure, employees know who to go to.

Insights Accounting is brought to you by Rea & Associates

Recover your capital investment more quickly through cost segregation

If your company is planning to build, purchase or renovate a building, or has done so in the past several years, a cost segregation study could help boost your cash flow and save your company significant money, says Chris Bzinak, CPA, senior tax professional at Clark Schaefer Hackett.

Cost segregation studies separate personal property from structural components, putting personal property into depreciable categories, which allows taxpayers to depreciate property over much shorter periods of time as opposed to the standard 39-year (or 27.5-year residential) time frame. By taking these deductions sooner, property owners lower their current-year tax liability and free up more capital.

Smart Business spoke with Bzinak about how cost segregation studies can be a smart tax strategy.

How should property owners determine whether a cost segregation study will benefit them? 

First, property owners should understand their tax situation up front. Is it advantageous to accelerate deductions now, rather than in the future? 

The experts performing the study can discuss on a case-by-case basis whether the money owners invest will be worthwhile. Typically, a facility should have been placed in service within the last five years, and the cost of the building, remodel, expansion or build-out needs to be at least several hundred thousand dollars. Generally, a free feasibility study will show the amount of increased deductions and cash flow over the life of the building, which gives property owners the ROI and the net present value of their tax deferral.

What type of savings can property owners expect?

In general, 20 to 40 percent of the purchase can be reclassified as personal property and depreciated more quickly, usually in five-, seven- or 15-year increments. Flooring, signage, landscaping and parking lots are examples of components that can often be reclassified.

Tax law changes to expensing rules, however, have increased the benefit of cost segregation. Now, anything that falls under a 20-year depreciable life is eligible for bonus depreciation, which means property owners can take 100 percent of the cost in year one. Roofs, HVAC systems, fire alarm systems and security systems installed on existing commercial buildings also may be eligible for immediate expensing under Section 179.

Are there any risks to doing a cost segregation study?

Property owners should ensure those doing the cost segregation study are utilizing an IRS-approved method with documentation that can stand up to an audit. Rather than doing a full cost segregation study with a reputable firm, some property owners will come up with estimates without the proper analysis and site visit. If they use those generalities to adjust their tax return, they face the risk of an IRS audit without evidence to support their actions.

How should building owners prepare for the analysis? How will the study be conducted?

Once an owner decides to go forward with a study, the experts conducting the study will need to ask questions, look through the appropriate documents and do a site visit to take photos, measure and count different items in the facility. If a building is newly constructed or remodeled, it’s important to have the contractor’s payment applications and facility blueprints ready. An older building’s study can be based on a depreciation schedule and appraisal from the time of purchase.

A report that breaks down the reclassification will then be issued to the property owners, who can take that to their accountants and apply it to their taxes. Most likely, this will not require them to amend their tax return; the owners just file a Form 3115, which is an application for change in accounting method to adjust their deprecation. 

Under today’s tax rules, virtually every taxpayer who owns, constructs, renovates or acquires a commercial (or residential) real estate facility stands to benefit from a cost segregation study. Is it time to see if you can recover your capital investment sooner?

Insights Accounting is brought to you by Clark Schaefer Hackett

How to prepare your business for an uncertain tax future

While the Tax Cuts and Jobs Act (TCJA) continues to challenge both advisers and taxpayers, the upcoming federal elections could bring changes to the current tax law. Given this uncertainty, it’s imperative to have regular, consistent communication with your tax adviser to take advantage of favorable provisions and not run afoul of the law.

“Tax planning and strategy must be a fluid, continual process, not simply a year-end exercise,” says Matthew M. McKinnon, Director, Columbus Tax Practice Leader, Brady Ware & Company.

Smart Business spoke with McKinnon about what’s tripping up companies in the TCJA, and how they should prepare for federal changes, should there be any.

What questions do companies still ask about the Tax Cuts and Jobs Act?

When it comes to the TCJA, there are four key issues that companies look to understand better: choice of entity, enhanced depreciation, eligibility of activities for the Qualified Business Income Deduction and Opportunity Zones.

With choice of entity, many companies wonder if it’s preferable to be taxed as a C corporation. Now that the first set of tax returns reflecting the new laws have been filed, companies can compare actual tax liability for 2018 against what it would have been if they converted their tax status to a C corporation. This comparison, however, should be analyzed in conjunction with short- and long-term business goals, growth expectations and other factors.

Depreciation optimization is another area of discussion. Currently, bonus depreciation and Section 179 rules allow taxpayers to deduct the entire cost of certain eligible assets in the year of acquisition. While these rules generally apply only to tangible personal property, a few exceptions exist for specific types of real property. Consequently, there has never been a better time to make capital expenditures, given today’s favorable depreciation provisions.

At a high level, the new Qualified Business Income Deduction offers a 20 percent deduction for qualified business income, with respect to any qualified trade or business of the taxpayer — and the law specifies what can be considered a qualified trade or business. Compliance, however, can be difficult, as there are many factors the activity must meet to qualify, especially when considering rental real estate.

Without a doubt, Opportunity Zones are the most asked about provision of the TCJA. Potential investors in these economically distressed communities can invest realized capital gains from the sale of other assets into a Qualified Opportunity Fund, which will invest in qualified property or a qualified business. In return, investors can realize temporary tax deferral of the realized gain, a step-up in basis to offset portions of the realized capital gain and permanent gain elimination on post-investment appreciation of the property or business.

How should companies plan their tax strategy given the uncertainty ahead?

For income tax planning, stay the course. Run your business and use the current rules to be as tax efficient as possible. If President Trump is re-elected, the landscape should remain largely unchanged until the next election. If a Democratic candidate wins in 2020, increases in tax rates would likely not be effective until Jan. 1, 2022, at the earliest, given the time frame in which the TCJA became law. Once the results of the 2020 election are known, businesses and their advisers can make the necessary adjustments to income tax strategy.

Estate and succession planning matters, however, should be addressed now. The estate and gift tax exemption has never been higher — $11.4 million per individual in 2019. Most of the Democratic candidates’ tentative tax plans include significant changes to the estate tax structure, such as elimination of the basis step-up for inherited assets and rollback of the exemption to the 2009 amount of $3.5 million.

How can companies avoid being caught in an unfavorable tax situation?

Communicate with your adviser. Have regular meetings to review your current and forecasted operations, potential transactions and short- and long-term business plan. The more your adviser knows about where you are and where you want to go, the more he or she can be proactive and nimble with tax strategy recommendations.

Insights Accounting is brought to you by Brady Ware & Company

How to use passive losses and passive income generators as a tax strategy

Back in the 1980s, taxpayers with a high tax rate would invest into real estate and other similar investment vehicles and end up with large upfront losses, such as depreciation, that offset their other ordinary income. Many thought this type of sheltering maneuver was unfair, says Tony Constantine, tax partner at Ciuni & Panichi Inc.

To slow this tax sheltering down, Congress created a framework of rules and classifications of activities for passive and non-passive income. Taxpayers can now only can offset passive losses again passive income. And if there is no passive income, it carries forward.

“That’s where a passive income generator comes in because it can be a tough pill to swallow when you’ve got a $20,000 loss on your tax return that you cannot utilize,” Constantine says. “If you have passive activity losses carrying forward, you can invest in something and accelerate the use of the losses that would be available at some point in the future.”

Smart Business spoke with Constantine about pairing passive losses with passive income generators.

How do taxpayers acquire passive losses?

Passive losses are ordinary losses generated by a passive activity. A passive activity is a business that a taxpayer is not involved in such as a silent partner in a business or owning real estate. Just because an activity has a passive loss doesn’t mean it’s a bad investment. It could be a rental property that has significant depreciation in any one year, which generates a loss, but is still cash flowing.

There is a framework of rules governing whether a taxpayer is a passive investor. However, it’s not cut and dry when looking at multiple activities. If you’ve invested in, say, five different real estate properties, it goes property by property and there’s an aggregation election you can make, if you meet certain hour requirements.

It’s also important to note that looking at financial statements or refinancing a property are considered investor activities. They don’t count as spending time on an activity for non-passive purposes.

How does someone know if they have passive losses on their tax return?

If you cannot remember if you’re carrying passive losses forward, check to see if Form 8582 is part of your tax return package. This form details out all passive loss carryforwards.

If your underutilized losses are building up, you can look at certain investments that might generate some income of a passive nature to offset that.

What investments can provide passive income generators?

A passive income generator may not fit everybody and you never want to let the tax tail wag the dog, but it’s beneficial to consider the investment tools that are out there to set your affairs up in the most tax-efficient manner.

Passive income generators can be an investment that’s marketed as a passive income generator, such as real estate or private equity funds that are structured in such a way that they’re going to throw off income. They may be more mature properties that don’t have much depreciation and little interest deduction, so they’re in the cash flow stage. You invest in a property that’s going to appreciate in value and throw off some income and corresponding cash, but you shelter it with your passive losses.

You never want to make an investment just to offset passive losses, because every investment has its risk. If something is supposed to be a passive income generator, it could be a loss if something goes wrong. But if you’ve looked the risks and you want to make an investment, making one in something that is going to generate some passive income to offset your passive losses just makes sense. You’re going to save yourself tax on that, either that year or in future years by offsetting the two.

Insights Accounting is brought to you by Ciuni & Panichi Inc.

Recover your capital investment more quickly through cost segregation

If your company is planning to build, purchase or renovate a building, or has done so in the past several years, a cost segregation study could help boost your cash flow and save your company significant money, says Chris Bzinak, CPA, senior tax professional at Clark Schaefer Hackett.

Cost segregation studies separate personal property from structural components, putting personal property into depreciable categories, which allows taxpayers to depreciate property over much shorter periods of time as opposed to the standard 39-year (or 27.5-year residential) time frame. By taking these deductions sooner, property owners lower their current-year tax liability and free up more capital.

Smart Business spoke with Bzinak and Kathy Pugh, CPA, tax director, about how cost segregation studies can be a smart tax strategy.

How should property owners determine whether a cost segregation study will benefit them?

First, property owners should understand their tax situation up front. Is it advantageous to accelerate deductions now, rather than in the future?

The experts performing the study can discuss on a case-by-case basis whether the money owners invest will be worthwhile. Typically, a facility should have been placed in service within the last five years, and the cost of the building, remodel, expansion or build-out needs to be at least several hundred thousand dollars. Generally, a free feasibility study will show the amount of increased deductions and cash flow over the life of the building, which gives property owners the ROI and the net present value of their tax deferral.

What type of savings can property owners expect?

In general, 20 to 40 percent of the purchase can be reclassified as personal property and depreciated more quickly, usually in five-, seven- or 15-year increments. Flooring, signage, landscaping and parking lots are examples of components that can often be reclassified.

Tax law changes to expensing rules, however, have increased the benefit of cost segregation. Now, anything that falls under a 20-year depreciable life is eligible for bonus depreciation, which means property owners can take 100 percent of the cost in year one. Roofs, HVAC systems, fire alarm systems and security systems installed on existing commercial buildings also may be eligible for immediate expensing under Section 179.

Are there any risks to doing a cost segregation study?

Property owners should ensure those doing the cost segregation study are utilizing an IRS-approved method with documentation that can stand up to an audit. Rather than doing a full cost segregation study with a reputable firm, some property owners will come up with estimates without the proper analysis and site visit. If they use those generalities to adjust their tax return, they face the risk of an IRS audit without evidence to support their actions.

How should building owners prepare for the analysis? How will the study be conducted?

Once an owner decides to go forward with a study, the experts conducting the study will need to ask questions, look through the appropriate documents and do a site visit to take photos, measure and count different items in the facility. If a building is newly constructed or remodeled, it’s important to have the contractor’s payment applications and facility blueprints ready. An older building’s study can be based on a depreciation schedule and appraisal from the time of purchase.

A report that breaks down the reclassification will then be issued to the property owners, who can take that to their accountants and apply it to their taxes. Most likely, this will not require them to amend their tax return; the owners just file a Form 3115, which is an application for change in accounting method to adjust their deprecation.

Under today’s tax rules, virtually every taxpayer who owns, constructs, renovates or acquires a commercial (or residential) real estate facility stands to benefit from a cost segregation study. Is it time to see if you can recover your capital investment sooner?

Insights Accounting is brought to you by Clark Schaefer Hackett

If the idea of a ransomware attack doesn’t keep you up at night, it should

Ransomware is like New York City, says Shawn Richardson, principal of Cyber Services at Rea & Associates.

Ransomware is a type of malware designed to threaten to publish the victim’s data or block access to company data until a ransom is paid. The two main types are designed to encrypt or lock out information so data aren’t readable and the victim cannot gain access.

Locker ransomware locks the computer, server or device, and Crypto ransomware prevents access to files or sensitive data through encryption. Believe it or not, ransomware dates back to the late 1980s with the AIDS Trojan. It’s been evolving since. Just like how New York’s downtown buildings have constantly changed over the past 25 years, ransomware gets bigger, better and more modern as bad actors build upon past forms.

“It’s gotten sophisticated,” Richardson says. “The ransomware is injecting itself inside of applications such as email through phishing. Often, all it takes is clicking on an email to execute some malicious code. Then, it attaches to local information stores like customer databases or accounts payable.” 

The cybercriminal promises to restore the data if the victim pays a ransom — but there is no guarantee you’ll get your data back, even if you pay. In some instances, attackers ask for a little bit of money first to generate trust and then extort more funds.

Smart Business spoke with Richardson about the ransomware threat, which may loom larger than you think.

What are examples of ransomware attacks?

The most prevalent types of ransomware are CryptoWall, Locky and WannaCry. But as they get used, people take the code, make copies and improve it with higher levels of encryption. There are variants that are uncrackable, and federal authorities don’t have the ability to reverse engineer the modified versions of ransomware. 

In one case, ransomware was dropped into a company’s Microsoft Office 365. It locked down the user database. Then it elevated the account permissions to allow the attackers to exfiltrate information and sent emails to the organization’s bank. Fortunately, the federal authorities caught on to what was happening before funds were transferred.

In another instance, a services company with fewer than 50 employees was attacked. The ransomware hit the backups first, which were not properly segmented off from the existing networks, and then locked its customer database and service contracts. The business never recovered the data and ultimately had to go back to a backup that was incomplete and nearly a year old.

Do businesses need to actually be attacked to feel the effects of ransomware?

No. A business can run the risk and hope nothing will happen, but it may grow large enough that its contractual obligations with third parties require a cybersecurity framework, audit, software, etc. Otherwise, the company won’t get that business.

Which companies face the greatest threat?

Small and mid-sized businesses are the most at risk today, as the lowest-hanging fruit within the threat landscape. Surveys have found an estimated 80 percent of small and mid-sized businesses have been victimized by ransomware within the last 18 months, and only 20 percent of them reported it.

These companies typically don’t have an IT company with expertise in security mechanisms and controls managing their infrastructure. Owners of small and mid-sized businesses often don’t put the resources into a cybersecurity strategy because they don’t recognize the need — although this is starting to change as they’re targeted.

Within the small and mid-sized business sector, the most targeted are health care, which includes small doctors’ offices, and government organizations like schools.

Where do you recommend businesses start with risk mitigation?

You should put in security controls and a framework to protect your company. Bring in a trusted adviser to talk about the risks within the operation and how to protect important data. Consider putting in a customized cybersecurity strategy that makes sense — John’s Auto Body will have a very different approach than Bob’s Dental, which must follow certain regulations. 

It all starts with a business conversation and it’s critical to have that conversation before the bad actors get ahold of your information.

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